USA Springs deal faces evaporation

Published: January 27, 2012

Even though an attorney for the potential Swiss financial backers of USA Springs told creditors on Thursday that they could still bail out the company and pay off creditors with a $60 million loan, nobody in the bankruptcy court in Manchester Thursday was confident it would happen.In fact, most thought it was unlikely.Indeed, while Judge J. Michael Deasy gave the order to extend the deadline to Feb. 29 to close the deal, parties were negotiating alternative arrangements that could include liquidation of the company, which is trying to build a controversial bottling company on the Nottingham-Barrington border. The plant would extract more than 300,000 gallons of water a day.Indeed, creditors said the only reason they didn't oppose the Feb. 29 extension is that they wouldn't be able to complete an alternative proposal by next month.The focus on Thursday was on Malom Group AG, the Swiss firm that in October said it was going to lend USA Springs $60 million to allow the company to pay off its creditors and complete the half-finished bottling plant.Bankruptcy is only the latest obstacle to USA Springs, which has pumped millions of dollars to secure permits in the face of tenacious opposition of some residents who claim the project would threaten their drinking water and would use international treaties to trump environmental regulations.USA Springs claims there is more than enough water available and the opposition is fueled by prejudice against foreigners, particularly Italians.To get the Malom loan, an unidentified investor with USA Springs fronted $1.2 million to Malom. Creditors were skeptical when USA Springs asked the court to allow the loan to go forward, and they are even more suspicious of it now."I have not seen a shred of evidence that the $1.2 million was related to practically furthering this loan," Michael A. Fagone, an attorney with the Official Committee of Unsecured Creditors, told the court on speakerphone.Malom said the loan was held up by tumultuous financial markets in Europe and the detention by Swiss authorities of two of its key executives related to the activities of another company. But at least one of those officials has been released and the plan could continue, the company said.Malom, represented by William S. Gannon, offered an affidavit outlining a timeline for a plan to sell notes with a $200 million face value that were issued by the military government in Brazil back in the 1970s.But Brazil now takes the position that many of the notes are fraudulent, and generally does not recognize them. Malom, however, has explained that this was only Brazil's negotiating stance, and it would redeem such notes if their validity could be verified, which Malom contends it has done.The problem is that even if they are valid, Brazil won't buy the notes until 2036.But Malom hopes that it will still be able to sell off that debt to a third party, and is forming a company in the Cayman Islands to do so, in million-dollar denominations."It looks to me like it's OK," said Gannon. "But it's hard to tell because it's another country. It may or may not be accurate.""Kind of like a commercial appraisal," said Judge Michael Deasy commented. "It's true if you believe all the assumptions."Gannon said he was "extremely" if not "absolutely" sure that Malom was working day and night to make the USA Springs deal work. Malom has been communicating with him frequently, though he did have concern about "the lack of communication with the third parties" that Malom was supposedly talking to.These reassurances did not win over Edmond J. Ford, attorney for Roswell Commercial Mortgage LLC, holder of the mortgage. Roswell claims USA Springs owed it about $10 million."We are concerned about the extraordinary amount of time and effort of chasing this," he said, adding that "we are in a different universe from where we started" when USA Springs assured creditors that Malom had the wherewithal to make the loan. Calling it a "leap of faith" that the deal would be funded would be "charitable," he said. "I don't know where this ends."It ends, said USA Springs attorney Alan L. Braunstein, on Feb. 29."Either it is funded or not," Braunstein said. Braunstein also said he also was "skeptical" that Malom would be able to fund the plan, and was working with creditors on a dual track on alternatives in case the funding does not materialize.Although timelines about these alternatives have been circulated, details have not been disclosed.In the past, Braunstein has said that other lenders or buyers were in the wings.If the Malom deal does close, the court set up the next hearing for May 1, with final court approval on September 28. That will be more than four years from when the companied filed for Chapter 11 reorganization. -- BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW

This article appears in the January 27 2012 issue of New Hampshire Business Review